I was approached about a land home deal close to me, and debating doing it for fun as the home doesn’t need much work.
Recognizing that many people finance these to a Buyer using an MLO or Seller Financing for their 1 deal per year limit - I was curious if there is any reason the rent credit program would not work for this type of transaction?
So if I asked a 40K purchase price @ $700 monthly rent and 50% of rent is provided towards credits the Buyer will have the option to purchase the land and home after ~10 years. I could transfer Title through the local Title Company and then with accounting say I sold the home for 40K and 1031 that money into something else.
If it smells like a mortgage, it’s probably a mortgage. What’s your defense against that?
In other words, rent-credit is different because the credit can be used against any home in a large portfolio. In your hypo, what else, besides the home that is being rented (sold over time) is the credit good for?
The people living in a specific home in a Park will purchase the home they’re living in, not some other home in the Park or part of the larger Portfolio - how many instances have you seen that happen?
My argument back would be that if this smells like a mortgage then the rent credit program in general smells like a mortgage. A mortgage is an interest bearing loan - this is not - rent credits are a cash program to purchase a home (and land in this case). So why does adding the land component complicate the program?
I spoke with Curt Smith on BiggerPockets about this topic just now (he does lots of land home deals) and he said the difference is that the rent credit program is intended to apply to Personal Property, and not Real Property - and that a deal like this would be seen as “fishy.” Apparently there are some folks using a wholesaling program called TIC, TAC, TOE that can do this, but need to read up more on how it works…
So just as a matter of law, whether or not a mortgage is a “disguised mortgage” does not depend on whether the asset is personal or real property. It matters whether the asset is a “dwelling” which mobile homes are. And other facts and circumstances.
In my opinion, rent credit differs from a disguised mortgage because the rent credit can be used to purchase any asset in the portfolio not the home in particular that is being lived in. How often does someone rent house X1 for 5 years and then decide to buy that different house Y2 when they’ve saved enough? I don’t know about Frank’s (or Sun Communities’) experience, but that happens actually quite often in our experience (we do not do a rent-credit program though). In my opinion, the defense of the rent credit program to a regulator not being a mortgage, is, “which house is being mortgaged? – we don’t know until the end!”
This is just my speculation and not legal advice for which I have done zero research. Of course none of this has been tested in court and Dodd-Frank is enforced by the CFPB with no money from Congress who left it to the states to enforce. So, whatever your state regulator says is the best you can go by right now.